EVALUATING THE IMPACT OF RISK MANAGEMENT ON PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA
ABSTRACT
This study focused on investigating the impact of risk management on the performance of firms in the manufacturing sector in Nigeria within the period of 2007 to 2015. This study was carried out to investigate the impact of working capital management and investment capital management on firm’s performance in the manufacturing sector in Nigeria and to also ascertain which of working capital or investment capital is managed more, using working capital and investment capital as proxies for risk management while using a return on asset and return on equity as proxies for performance.
Secondary data were collected from the publicly available audited financial statement of the companies selected. Ordinary least Squares Regression was adopted in testing the relationship between risk management and performance of the seven companies respectively while descriptive analysis was done with the use of graphs in analyzing changes in the variables over time… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
INTRODUCTION
Background of the Study
A Risk may be defined as the probability of occurrence of an adverse event. Risk refers to the uncertainty that surrounds forthcoming events and outcomes. It is the expression of the likelihood and impact of an event with the potential to affect the achievement of an organization’s goals (Heinz, 2010). Risk can be seen as a state where there is a likelihood of a loss but also a hope of gain (Emma & Gabriel 2012). The term risk can also be defined and elucidated in many different ways depending on the aim and perspective of a discussion. Kaplan and Garrick (1981) stated that risk is a doubt joint with damage or a loss.
They mean that something that is indeterminate does not have to incur a risk; however, if an event is considered as both indeterminate and a loss is included, it can be defined as a risk. The Society for Risk Analysis (2012), defines as “The potential for realization of unwelcome, adverse consequences to human life, health, property, or the environment”. Since one would never jeopardize the loss if there were no chance of a win. To realize the existence of a risk, one must be aware of both the gains and losses incurred and therefore a risk can be reflected as individual and relative to the observer (Kaplan & Garrick, 1981).
All these definitions seek to make known that risk is to be seen as part of daily life, and the presence of risk in any environment should not be a problem but the focus should be on how those risks are being managed and in turn minimizing their potential effect… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Research Problem
In recent times, financial disasters in both financial and non-financial organizations have been witnessed. This, therefore, stress the need for numerous and wide approach in forms of risk management. A financial misadventure is not a new scene in the financial industry. Manufacturing firms and other financial institutions are supposed to meet the regulatory requirements for risk measurement. Commercial firm managers need adequate and reliable risk measures to reduce the risk of capital staying outside the set limits.
Therefore manufacturing firms managers need mechanisms to monitor and project on positions and adequate credit incentives for the best risk management by business divisions and individuals… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Research Objective
The goal of the study is to set up the relationship between risk administration and performance of manufacturing firms in Nigeria.
LITERATURE REVIEW
Introduction
This chapter discusses the theoretical review of the study whereby the main theories on risk management will be discussed. The chapter also highlights the determinants of financial performance in manufacturing firms, Empirical review, and further conclusions on the chapter. The conclusion of this chapter will be on how this research intends to cover the knowledge gap and the ways in which this research paper intends to fill the knowledge gap.
Theoretical Review
The section covers the most applicable theories in risk management. The theories discussed are Modern Portfolio Theory, Moral Hazard Theory, and Merton’s default Risk Theory. We shall also discuss which theory we are going to base our research on.
Modern Portfolio Theory
The hypothesis of Modern Portfolio Theory (MPT) is speculation set forth by Harry Markowitz in his paper. The hypothesis was distributed in 1952 by the Journal of Finance. The venture hypothesis depended on the possibility that risks disinclined financial specialists in the business can build portfolios to expand expected stock returns based on the level of market risks in speculation, understanding that risks are an inborn and huge piece of higher reward in the venture.
The hypothesis came to be among the most critical and noteworthy financial speculations in the realm of fund and venture. The hypothesis is additionally alluded to as a portfolio hypothesis and proposes that it is workable for financial specialists to build a proficient bleeding edge of ideal portfolios, which offers the most extreme and conceivable expected returns for a particular given level of risk. It encourages and recommends that for speculators, it is not sufficient just to center at the normal risks and stock return of one particular stock.
By putting resources into numerous stocks, a financial specialist can win in case of broadening, by diminishing the risks in the portfolio given. ‘This hypothesis consequently tries to measure the advantages of enhancement. For most investors, the risk part is that any return from an investment might be lower than the expected returns or put in other words, the variations from the expected stock returns. According to the theory, each stock has its own deviation from the stock mean. This standard deviation from the mean is called risk, (Markowitz, 1952)… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Empirical Review
Internationally a good number of studies in the research area have been done; Mohd and Salina (2010) investigated the relationship between risk administration practices and financial execution of the Malaysian Islamic manufacturing firms. The period under study covered 2006 to 2008. In order to measure the risk administration practices, the researcher used five-component issues in regard to firm supervision practices as per the Basel committee.
The five components used in the study are namely, the firm Risk Management Environment, Policies and Procedures of the firm, Risk Measurement procedures, Risk Mitigation, firm Risk Monitoring, and firms Internal Control. The components mentioned were then linked with the mean of ROA and ROE. The study revealed that Islamic manufacturing firms with higher ROA and ROE tend to have better risk management practices.
The study focused only on the 5 independent variables as the risk management measures determining financial performance. This study, therefore, intends to focus on additional measures hence reducing the error term… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Conceptual Framework
The conceptual framework can be defined as a tool used in the analysis of variables in a study. The conceptual framework is to show conceptual distinctions, processes or thoughts and organize the ideas in the study. Strong conceptual frameworks should capture the concepts in the study in a way that is real and easy to remember and apply.
The main objective of the Conceptual Framework in the study is to show and improve the understanding of the concept risk management by providing a more complete, clear and updated set of concepts such as the dependent and independent variables and the linkages (Tobin, J., Brainard, W., 1968)… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
RESEARCH METHODOLOGY
Research Design
The research outline gives the wanted system to the information gathering and its examination Bryman and Bell, (2007), or it can be defined as the arrangement and structure of examination conveyed in order to acquire answers to research questions Cooper and Emory, (1995). This consequently implies it gives the methods fancied for getting the data expected to take care of the exploration issues.
The researcher utilized a subjective way to interview firm mangers in the risks division since they are experienced experts who were seen as a profound comprehension of the theme understudy
Population
The target population is defined as the group of individuals from which the study seeks to generalize it’s and concludes on its findings. The target population comprised of the forty-two (42) manufacturing firms as per appendix 1.
Data Collection
In order to get appropriate results, the study used both primary and secondary data. The purpose of using primary source data was to get a perception of factual information on issues of risk management by the manufacturing firms. The primary data for this study was collected using personally administered questionnaires as per appendix 2. The questionnaire was adapted from Khan and Ahmed (2001) and Ariffin et al. (2009)… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
RESEARCH FINDINGS AND DISCUSSIONS
Response Rate
The study targeted 42 manufacturing firms in Nigeria. Out of the target population, only 30 manufacturing firms filled the questionnaires and returned representing a response rate of 71% which is within the recommended rates as per Mugenda’s (2003) accepted significant response rate for statistical data analysis which was established at a minimal of 50% as per the study.
The commendable response was realized after the researcher made an effort to remind the respondents to fill in the questionnaire and return. Out of the 30 manufacturing firms which responded, 9% represented public manufacturing firms, 21% foreign firm and 70% were local manufacturing firms. The response rate is represented in the graph below.
Source: Research Findings
Descriptive statistics
In the study, the risk management practices were analyzed as per risk procedures described in the questionnaire. The mean and standard deviations of the variables under study were also analyzed with an objective of examining the effects of risk administration practices on the performance of Nigerian manufacturing firms. The figures are given in the table 4.1 below
Table 4.1 Descriptive statistics
| Risk management Practice | Response
rate (%) |
Mean | % Mean | STD
deviation |
| Risk Management
Environment |
71 | 4.83 | 96 | .379 |
| Risk Measurement | 71 | 4.83 | 96 | .379 |
| Risk Mitigation | 71 | 4.66 | 92 | .479 |
| Risk Monitoring | 71 | 4.50 | 90 | .508 |
| Adequate Internal Controls | 71 | 4.33 | 87 | .758 |
| Capital Adequacy | 71 | 2.83 | 57 | 1.23 |
| Investment guidelines and
strategies |
71 | 4.50 | 90 | .508 |
The table above shows the risk management… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
SUMMARY, RECOMMENDATIONS, AND CONCLUSIONS
Summary
The study relied on both primary and secondary data to determine the relationship of risk management practices in Nigerian manufacturing firms. The study used statistics such as correlation analysis and regression analysis. The study showed that all the manufacturing firms in the study adopted and practiced good risk management practices with some showing need for improvements which scored as low as 1 point in the Likert rating. Capital adequacy is poorly implanted as per the research results… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Conclusions
This study has therefore concluded that adequate risk management practices in Nigerian manufacturing firms will lead to positive performance financially. This has been concluded from the correlation analysis of the variables in the study. The beta coefficients realized in the regression equation were all positive which is a clear indication that an increase in any of the risk management practices would lead to positive results in ROE ratio for the manufacturing firms… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
Recommendation
From the findings in the study which were based on factual information from the firm Manager, we recommend the following; Nigerian manufacturing firms should expound their risk measurements techniques and adopt more technical and reliable measures so as to adequately manage the financial risks resulting from the increased financial innovations in the sector The financial innovations have been made a reality by use of advanced information techniques… (Scroll down for the link to get the Complete Chapter One to Five Project Material)
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